The BSE Sensex has been flirting with new highs these days. It touched an intra-day high of 22,030.72 on March 18, 2014. The Sensex had touched similar high levels in January 2008, more than six years back. It is interesting see how the Indian investors and foreign investors have behaved since then.
The foreign institutional investors (FIIs) have bought stocks worth Rs 1,56,517.42 crore between January 2008 and March 14, 2014. During the same period the domestic institutional investors have sold stocks worth Rs 25,184.3 crore. Given this, for every rupee worth of stocks sold by the Indian institutional investors, the foreigners have invested Rs 6.21 (Rs 1,56,517.42 crore divided by Rs 25,184.3 crore) in the Indian stock market.
Why has that been the case? There are number of reasons for the same. The investment bank Lehman Brothers went bankrupt in September 2008. This unleashed the current financial crisis. In order to tackle this crisis, the Western nations have run an easy money policy, which includes maintaining low interest rates as well as printing money, in order to get their economic growth going. The idea being that people will borrow and spend money at low interest rates, which will benefit businesses and in turn lead to economic growth.
The easy money policy has allowed the big institutional investors to borrow money at very low interest rates and invest it in financial markets all over the world. That is the major reason behind foreign investors investing Rs 1,56,517.42 crore since January 2008, in the Indian stock market.
In fact, things get even more interesting if we consider data from December 2008 onwards, given that the western nations started to run an easy money policy towards the end of 2008. Since December 2008, the foreign investors have invested Rs 2,59,354.8 crore in the Indian stock market. During the same period the domestic investors have sold stocks worth Rs 96,244.8 crore.
What explains this contrast? The easy money policies explain one part of the argument, they clearly do not explain why Indian domestic investors have stayed away from the stock market. Lets look at some data that might throw up some clarity.
Data provided by the Association of Mutual Funds in India(Amfi) shows that in January 2008, around Rs 1,72,885 crore was invested in equity mutual fund schemes. It is important to understand here that the money was invested in equity mutual fund schemes and not necessarily stocks. A mutual fund scheme that invests more than 65% of the money that it manages in stocks is categorised as an equity mutual fund scheme. Money invested in equity mutual fund schemes formed around 32% of the total money managed by mutual funds at that point of time.
In February 2014, the amount invested in equity mutual fund schemes stood at Rs 1,57,227 crore. Money invested in equity mutual fund schemes formed only around 17% of the total money managed by the mutual funds.
In January 2008, the amount of money managed by mutual funds stood at Rs 5,48,064 crore. This has since then gone up to Rs 9,16,393 crore. Hence, mutual funds are clearly managing more money than they were a little over six years back, but the amount of money they manage under equity schemes has clearly come down.
Since August 2009, the Securities and Exchange Board of India (Sebi) made it mandatory for mutual funds not to charge any entry load on mutual fund schemes. Prior to this, out of every Rs 100 put in by an investor in any equity mutual fund scheme, Rs 2.25 used to be charged as an entry load and passed onto the agent as a commission.
With almost no commissions on offer, agents stopped selling equity mutual fund schemes to retail investors. Hence, the amount of new money coming into the equity mutual funds and through them to the stock market has come down dramatically. What has also not helped is the fact that investors have redeemed their investments in equity mutual fund schemes big time since January 2008.
Investor interest has also gone away from unit linked investment plans (Ulips) offered by insurance companies. Ulips are essentially investment cum insurance plans which offer the investor an indirect option of buying stocks among other things.
In the bull market that ran from 2004 to 2008, banks and insurance agents mis-sold Ulips big time given the high commissions on offer and in a large number of cases promised to double the money invested in three years. By now a large number of Ulip investors have figured out that the only person who gained in case of Ulips was the insurance agent. Hence, investors have stayed away from investing in Ulips and through them into the stock market.
Given this, unlike the foreign investors, the Indian institutional investors have found it difficult to raise money to invest in the stock market over the last six years. And that explains to a large extent the fact that foreign investors have invested a lot of money in the stock market, whereas the Indian investors have stayed away.
The article originally appeared on www.firstbiz.com on March 19, 2014
(Vivek Kaul is a writer. He tweets @kaul_vivek)